Chapter 612. Constant-Growth Model. Gentlemen gym just paid it annual

QUESTION

Chapter 612. Constant-Growth Model. Gentlemen gym just paid it annual dividend of $3 per share and, and it is widely expected that the dividend will increase by 5% per year indefinitely 1- What price should the stock sell at? The discount rate is 15%2-how would you answer change if the discount rate were only 12%. Why does the answer change.
Annual Dividend = $3Growth rate = 5% Price of stock = Annual Dividend *(1 Growth rate)/(Cost of Equity- Growth rate) =3*(1 5%)/(15%-5%) =$31.50b) If discount rate changes to 12% Price of stock = Annual¦

ividend *(1 Growth rate)/(Cost of Equity- Growth rate) =3*(1 5%)/(12%-5%) =$45The price changes due to the change in the discount rate.

ANSWER:

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